Small business agreements - you get by on trust until you’re bust

Small and startup businesses work a lot on trust and verbal agreements, because being cautious and doing it formally costs time and money. It works – until something goes wrong.

You see an opportunity; you find friends or colleagues who share your passion for entrepreneurship and together you launch into the exciting early days of building a business. In the heady rush of planning, marketing and day-to-day business survival, there is little time for looking ahead, and little inclination to consider the legal dramas that could lurk over the horizon. You get by on a wing and a prayer… a lot of prayer.

Entrepreneurs are by their nature, optimists. It takes commitment and a positive outlook to take on the hardships in building a new business. Too much time spent pondering the risks saps a venture of its vitality. Many businesses start trading without any proper legal agreements in place – no time, gotta close that deal.

I’m not even talking about advanced legal work, but basic stuff, like regulating the relationship between the partners or shareholders of the business, or its relationships with employees, suppliers and customers.

Formalising the handshake

But the hard lesson that many businesses have learnt is that these agreements become vital once the business is established. You may have been able to wing it on the basis of informal arrangements with your customers or suppliers, especially when the transactions involved were for just a few thousand Rand, but the picture is very different (and far more risky) when your volumes have increased to a point where your business finds itself transacting for hundreds of thousands of Rand, without protecting itself contractually.

Often, habits of informal agreements are so deeply ingrained, you don’t even realise you’re still winging it legally. Until you have to go to court.

The legal problems are more often internal than external. Like in a new marriage, partners in a business tend to get on effortlessly when they are enthused with the early excitement and potential of their growing business.

A few years on, when the business is doing well, the partners need to decide for the first time how the extra cash should be applied. Will bonuses be paid or will the money be ploughed back into the business? Should they be looking to sell the business while it’s at its peak, or hold on and profit from the business income?

How much of the money is each partner entitled to exactly, and what about all those unrecorded sacrifices, loan accounts or expenses that each partner thinks should now be recognised? Let’s face it – money (particularly large amounts of it) has the potential to bring out a person’s ‘difficult’ side.

Once the business has grown and the money has begun to flow, it’s too late to look at putting a proper legal structure in place. Business partners who are already fighting about the application or division of income can’t sit down in a calm and rational manner to reach agreement on how business income should be dealt with.

In the same way, customers and suppliers who have for years had the benefit of transacting with the business on an informal basis may be suspicious of any attempts to suddenly impose contractual terms on them.

The opportunity for sorting out these legal measures is best taken in the early days of the business. Good news, however, is there is now a middle road between “winging it legally” and huge lawyer fees.

It is possible to benefit from innovative legal drafting solutions that are now available on the web, but only when the drafting is tailored and customised to an individual case, as a real live lawyer would do. This can give business owners quality, customised contracts at completely affordable rates.

At the very least, it will save business owners a bundle in fees in only needing a lawyer tweak the more complex or unusual contractual terms to an agreement. At the very best, an ‘artificial intelligence’ legal document will give business owners substantial protection against the most commonly encountered risks.

Entrepreneurs shouldn’t delay formalising their legal agreements. You’ve worked too hard to see it all go up in flames or being worn out in a duel to the death in court, where no-one wins but the lawyers.

Article written by Richard van Helden, Director of Legal Services at Law Unlocked, e-mail: richard@lawunlocked.co.za. The website www.lawunlocked.co.za is generally regarded as the current market-leader in the provision of web-based legal solutions, offering fully customised legal documents online and delivered the same day.